By: Jennifer Edwards, CFP®, CSLP®
What’s With These Housing Prices?!
So, you’ve learned that mortgage interest rates are low and have looked at your income stability and other relevant factors and determined that you are ready to buy a home. You go online to one of the major real estate listing sites and see a home you like at a certain price. How do you know if that’s a fair price? Is the asking price always reflective of actual value? Will a home always appreciate in value after you buy it?
Well, let’s get into it.
The price you see on Zillow, Realtor, Trulia, etc. is the price the seller is asking for their property. But it’s not like buying a bicycle, or a bedroom set or even a car. Home values fluctuate with supply and demand and react very quickly to market changes. It’s important to do some research to better understand what position you are in as a buyer or a seller when markets are trending a certain way.
Historical trends
As important as what the asking price is today is what it is relative to what it has sold for in the past. Or, if it’s new construction, what similar properties have sold for in recent years. Most listing sites have price history and estimated value features available. You’ll be able to see if there have been any recent price changes and what it has sold for in the past. You can then use that information to gauge movement in the market. Is the home much more expensive than what it sold for only a couple of years ago? Have price changes been moving upward or downward? These are all things that will help you determine whether or not you are in a buyer’s or seller’s market.
More indicators
Markets react to supply and demand. If there are a lot of homes for sale and not that many interested buyers-that’s a buyer’s market. When demand exceeds supply, seller’s have the advantage. In a seller’s market homes sell quickly. A home that you saw for sale this morning, may be “pending” by this afternoon. This often leads to bidding wars where buyers make competing offers and drive up the final price. Seller’s are getting their asking price or even better.
In a seller’s market, seller’s also don’t have to make many concessions. If you are asking your agent to put stipulations in the offer, what are called contingencies, and your agent says, “we’ll never get the house with all that in there” you know it’s a seller’s market. Don’t expect much by way of help with closing costs, either.
If people are talking about a housing “bubble” or how houses weren’t selling for anywhere near that a couple of years ago, you’re probably facing a seller’s market. If construction costs are rising rapidly, that’s also another indication. Be careful because prices could drop and you don’t want to find yourself upside down (where your house is worth less than you owe).
Another indication that homes are selling quickly is the number of days they have been listed on the Multiple Listing Service or MLS (national database of properties for sale), but there are techniques people use to keep that number low, so take it with a grain of salt.
I understand the market conditions. Now what?
If you are looking to buy a home in a seller’s market, just realize you come to the table at a disadvantage. The seller is holding all the cards, so if you want that house, you are going to be the one making concessions.
Get pre-qualified. Real estate agents won’t even talk to you if you haven’t already shown a lender you are in a position to buy.
Be ready to act fast. If you need to sell your current home in order to have the down payment, that’s probably not going to work. You’ll need liquid cash as earnest money and expect to cover the closing costs.
Don’t buy something, just to buy something. It can be hard to keep your head when everything is changing so fast. But, a home is often the most expensive purchase people make, so get something you will be excited about, even if it takes some time. You may have to put in multiple offers before you actually win a contract, so be patient. If you find you aren’t getting anywhere or prices are rising out of what you can afford (we suggest trying to keep your TOTAL debt ratio to 28% or less), you may determine that it’s not the right time to buy after all. Renting is not always a bad option. It’s better to rent than to be house poor.
For those of you looking to buy in the near future, check out our podcast: The Housing Decision.
